June 13, 2018
Unbiased Financial Information Provided by Financial Finesse
Picking your auto loan is every bit as important as picking between the cherry red and the metallic black paint job on your new wheels. If you shop carefully, you could find loan terms so competitive that you have money left over to buy those fancy new license plate frames, too.
Auto Loan Basics
- The term for an auto loan typically ranges from three to five years.
- The amount of your monthly payment will depend on the length of the loan, how large a down payment you make, and the interest rate you're charged.
- According to Bank Rate -- an aggregator of financial rate information -- the average four-year new car loan rate was around 3%, but, depending on the economy, rates at the time of your purchase could be significantly higher or lower.
- As with all lines of credit, the approval of your auto loan will largely depend upon your credit score and your current income.
- If you have bad or no credit, your auto loan will come with a higher interest rate.
- If you have a good, long-standing, personal relationship with your credit union or bank manager, you may receive more leniency when it comes to borrower requirements. Since most dealers farm out their loans to outside lending institutions, don't expect this type of subjective leniency from a seller.
- Whether you get your loan from a credit union or a dealer, the title, or pink slip, to the vehicle will remain with the lender. Once you have completely paid off the auto loan, your lender will transfer the title to your name and you will own the car outright.
Is Dealer Financing the Best Deal?
Most people walk into a car dealership, pick out the car they want, and then negotiate the vehicle price and the terms of an auto loan. Is that really the best way to approach the transaction?
According to Eva Rosenberg, an enrolled agent and financial advisor, the best way to finance your car is with an auto loan from your credit union or bank. "Get preapproved for a loan before you go to the car dealer," advises Rosenberg, who also says you should negotiate the sales price of the car before ever telling the dealer about your financing. "If the car dealer believes he's going to make money off the financing, he'll come down further on the car's price," says Rosenberg. "Once you settle on the best price, get the offer in writing -- before you break it to your salesperson that you're preapproved for a loan."
While it may be more convenient to get the dealership to finance your purchase the same day you buy your car, you'll end up paying more for the service.
That being said, dealers do sometimes trump credit union or bank rates with zero-percent financing deals. Keep in mind that those outstanding terms can be difficult to qualify for. You typically have to have excellent credit, and the loan term is usually limited (three years or less), meaning your monthly payment will be larger than if you were planning to get a five-year loan. Also, you may be required to buy from the dealer's existing inventory.
Regardless of where you ultimately get your financing, continue to keep your eye on interest rates. Many credit unions, banks and Internet-based lenders are now offering refinancing for auto loans. If rates drop significantly, refinancing can mean extra money in your pocket every month. (Before you decide to refinance, however, take into consideration any additional fees or points charged that could make the new loan more expensive.)